Anyone trying to understand how brutal the competition can get in China’s no-holds-barred Internet sector needs to look no further than Chinese search giant Baidu Inc.’s agreement this month to acquire mobile-app store operator 91 Wireless Websoft Ltd. for $1.9 billion.

With some tech watchers wondering how Baidu and 91 Wireless parent NetDragon Websoft Inc. arrived at such a large figure, the chief executive of one of Baidu’s fiercest rivals said last week he had urged the management of 91 Wireless to ask for hefty sum.

On Tuesday Qihoo 360 Technology Co. confirmed that Chief Executive and founder Zhou Hongyi made the remarks at Stanford University as part of an informal lecture on July 16th. During the lecture, Mr. Zhou said prior to 91 Wireless receiving any bids, he told the management not to sell the company, which runs one of the country’s largest app stores. Once bidding began, he said, he continued to tell them not to buy, unless they received a price they could not refuse.

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When they asked how much that would be, Mr. Zhou said at least $2 billion.

He said did not expect the deal to be done for that much.

Qihoo said it did not actively bid on 91 Wireless. The comments from Mr. Zhou – one of the Chinese Internet industry’s most vocal executives – highlight the longstanding rivalry between Baidu and Qihoo. They also show how competition is heating up between China’s largest Internet companies as they fight to win ground with a growing generation of smartphone-carrying Chinese consumers.

It is unclear whether Mr. Zhou’s comments had any impact on negotiations between Baidu and 91 Wireless. Spokespeople for Baidu and 91 Wireless declined to comment on the remarks.

Analysts said the potential tie-up between Baidu and 91 Wireless would give Baidu a valuable way to distribute content to smartphone users in China, and also a new way to connect its advertisers to a large distributor of mobile applications. It would also give Baidu control of the largest competitors to rival Qihoo 360’s app store, according to analysts.

Though Google Inc.'s Android mobile operating software is the most popular in China, Google’s application store, called Google Play, is often unreliable and sometimes outright inaccessible. Analysts attribute Google Play’s accessibility problems to government filters imposed after the U.S. company shifted much of its China operations to Hong Kong to avoid having to comply with censorship requirements.

As a result, a number of third-party Android application stores compete for users. While some are run by China’s biggest Internet companies, others are run by smaller, independent companies. The app-store market remains fragmented for Android in China, with many users facing difficulties downloading content free of viruses and malware.

In a separate response to the acquisition on Tuesday, Junyu Wang, the head of another one of China’s largest application stores, Wandoujia, circulated a note responding to inquiries following Baidu’s acquisition. In it, Mr. Wang said that his company was not for sale.

In an interview with China Real Time, Mr. Wang said he was surprised by the price Baidu agreed to pay for 91 Wireless: “I don’t know what the back story behind [the deal] is, but it’s a lot of money…the big players might be overpaying for this type of company, so from the market metrics, we feel it’s kind of unreasonable. But given the current competitive landscape between Baidu and Qihoo 360, then it’s kind of reasonable.”

Mr. Wang said Wandoujia wants to grow bigger before contemplating a sale to any company, adding that the company has daily app distribution of over 30 million and is adding 500,000 new users to its Android application each day.

Mr. Wang, a 27-year-old entrepreneur who previously worked at Google, also said in his note that he and his two co-founders were committed to the company: “Our three co-founders are all first-time founders – none of us have bought a house, none of us has a nice car – so to take a big sum of money home to care for our loved ones, that’d be a lovely thing, right? But the truth is, aside from our cats, we really don’t have any other hobbies – if we retired we wouldn’t know what to do with ourselves.”

In the interview, Mr. Wang added that he couldn’t name the companies that had thus far approached him about a potential acquisition, but did say, “almost every [Chinese Internet company] you’ve heard of has contacted us.”

China’s Internet companies are spending more than they ever have, and much more quickly, to get a toehold in the mobile industry. Given the attention Mr. Wang’s company is getting and the price-tag one of China’s other leading app stores fetched, it’s possible he might change his tone in the not-so-distant future. The question is what Zhou Hongyi will be whispering in his ear when the time comes.

About China Real Time Report

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